WHAT WOULD YOU DO WITH YOUR MONEY?

Imagine that you are rich.  Imagine that you want to stay rich.  So you loan people money.  You charge interest.  When people pay you back, you get a little extra cash in addition to the principle you loaned them.  Sounds like a good deal, right?

Any loan involves a certain amount of risk.  What if the borrower does not pay you back?  If you are going to loan your money to other people and only charge a small amount of interest, you have to get paid back almost every time, or you lose more money than you make in interest.

What can you do to avoid the risk of the borrower stiffing you on the loan?  If you are making house loans, there are at least four things you can do. 

• You can do a credit check. 
• You can charge high risk borrowers (those with low credit scores) a higher rate of interest.
• You can require the buyer to put some of their own money down, about 20%.  That gives the buyer an incentive to take care of the house.  Even the buyer defaults on the loan, they will want that money back.
• You can require that the buyer put up the house as collateral for the loan.

Did Fannie Mae and Freddie do all of these things?  Have you been reading the newspapers?

What Fannie Mae and Freddie Mac helped to do is to make credit so easy we had people buying homes they could not afford.  Worse, we had lenders giving naive fools adjustable rate loans they did not understand.  That is not only unethical it is bad business. 

What kind of idiot lends people money when they know they will not pay it back?  Of course there is only one answer — a government sponsored agency.  Yes, I know original lenders were private companies, but after following the government’s rules, those private companies sold their loans to the government sponsored agencies.

Now we are being told by our lying politicians that the bailout will cost much less than 700 billion dollars.  That is supposedly because the market will eventually recover.  Then the govenment will be able to sell the loans back to private investors and recover almost all of its money.

Baloney!  Read this story (here) in the Washington Post. 

The titular owner is Fannie Mae, which the U.S. government effectively subsumed this month, though the legal machinations are still ongoing. With the Treasury backing Fannie Mae, taxpayers have a huge interest in the fate of the mortgage giant’s assets. They include the 1,296-square-foot, two-level, three-bedroom, 1 1/2 -bath house on Barksdale.

The most recent owner, Phyllis High Jones, refinanced the house through Countrywide Home Loans in 2006, taking out a $208,000 mortgage that would gradually inflate to $226,000. That same year, Fannie Mae bought the loan from Countrywide. Then the housing market collapsed in Prince William County. Jones defaulted this year. The townhouse went up for auction, but there were no takers. Fannie Mae had no choice but to become the buyer of record — sale price $226,000.

This summer, Fannie Mae tried to sell the townhouse for $149,000. Still no reasonable offers.

The price has now been lowered to $69,900.

Consider how much the house in the story dropped in value.  Will it go back up in value?  With some help from inflation and more stable economy, it probably will.  But the fact is that the house was overvalued.  Consider what the housing bubble was all about.  Due to easy credit, houses became overpriced.  Do we want easy credit again?  What other scheme do our lying politicians have in mind?  Do you really want to find out?

If the government now buys the loan for what is it now worth, will that restore investor confidence?  If the government pays off the full value of the loan, how will taxpayers get back their money?  We will not.  You can kiss most of that 700 billion dollars goodby.

Cartoons from here.